Locking In Lockheed's Fat Yield With Sequestration In Final Countdown

Defense stocks as a group hit a rough patch starting in January as the March 1 deadline looms, when nearly $1.2 trillion in automatic federal spending cuts over the next 10 years are scheduled to kick in, unless Congress acts to prevent or modify the so-called 'sequestration.' The ax would fall heavily on the Department of Defense, with $487 billion in mandatory cuts over a decade. Through the end of September, the hit to the Pentagon will be about- $44 billion.

Selling has dragged share prices of several aerospace and defense firms nearly 10% lower in the past several weeks, including General Dynamics, Northrop Grumman, Raytheon and Lockheed Martin. In the case of Lockheed, lean valuations and a fat 5.2% yield make the stock look attractive, even with an uncertain future.

Bethesda, Md.-based Lockheed Martin emerged from the 1995 merger of Lockheed and Martin Marietta. It is the single largest defense contractor, and operates in aeronautics, electronic systems, information systems & global services and space systems. Some of its marquee military aircraft include the F-35 joint strike fighter, F-16 fighter, F-22 Raptor stealth fighter and the C-130J Hercules airlifter. It also sells the military a host of advanced communications and weapons systems.

Lockheed shares appeared to be a good value in the post-election selloff, and they did rally 10% from mid-November to their 52-week high of $96.52 on January 24. What was troubling back in December was the level of insider selling, but most of that was done at prices higher than where they are now just above $87 per share, pressured by the looming budget deadline, as well as the temporary grounding of part of the F-35 fleet because of an exhaust problem.

In 2012, Lockheed earned $8.54 per share on revenue of $47.18 billion, up from $7.81 per share on $46.5 billion in revenue for 2011. For 2013, Lockheed expects EPS to come in between $8.80 and $9.10 per share, with revenue of $44.5 billion to $46 billion. Those kinds of numbers provide ample coverage for the $4.60 in annual dividends, up 15% from one year ago, and up 53% from two years ago. Lockheed has paid dividends every quarter and hiked them nearly every year since 1984.

There is certainly uncertainty in the picture, but the stock may already be reflecting much of it. The five-year average price-earnings ratio for Lockheed is 11.14. Applying that multiple to this year's expected $8.95 per share in earnings and you get a stock price just shy of $100.

I am the deputy editor of investing content for Forbes Media. I'm responsible for money and investing coverage on Forbes.com and in Forbes magazine. As editor of the Forbes Dividend Investor newsletter service, I send out two dividend stock recommendations per week and send...